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How would the current and quick ratios of a service business compare?
Corporate Financial Accounting
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Corporate Financial Accounting
How would the current and quick ratios of a service business compare?
Current ratio and acid-test ratio
Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.
Formula:
Acid-Test Ratio: This ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:
Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets:
To compare: Current and quick ratios of the service revenue.
Explanation of Solution
These two ratios are very close as the most service busin...
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